THE MORTGAGE CORNER

Existing-home sales, including single-family, townhomes, condominiums and co-ops, increased in June for the third consecutive month—3.6 percent to a seasonally adjusted annual rate of 4.89 million units from 4.72 million in May. That is delaying any uptick in new home sales, however.

Lawrence Yun, NAR chief economist, is hopeful about the gain, anyway. “The increase in existing-home sales occurred in all major regions of the country,” he said. “We expect a gradual uptrend in sales to continue due to tax credit incentives and historically high affordability conditions. Despite the rise in closed transactions, many Realtors are reporting lost sales as a result of new appraisal standards that went into effect May 1 of this year.”

Total housing inventory at the end of June fell 0.7 percent to 3.82 million existing homes available for sale, which represents a 9.4-month supply at the current sales pace, down from a 9.8-month supply in May. Raw inventory totals are 14.9 percent below a year ago.

“This is another hopeful sign – if we can keep the volume of sales above the level of new inventory, prices could stabilize in many areas around the end of the year,” Yun said. An NAR practitioner survey in June showed first-time buyers accounted for 29 percent of transactions, unchanged from May, and that the number of buyers looking at homes is up nearly 12 percentage points from June 2008.

New-home sales are another matter.  June’s 11 percent increase brought sales back to last November’s level, but it is still down 21 percent in 12 months.   The consensus is that all the existing-home foreclosures are diverting buyers from new homes, with deals too good to pass up. But inventories continue to decline, a good sign for builders that will spur housing construction, as the NAHB builders’ sentiment survey continues to climb. In fact, housing starts are already rising, with single-family construction up 31 percent from its January-February historic low.

Single-family existing-home sales rose 2.4 percent to a seasonally adjusted annual rate of 4.32 million in June from a level of 4.22 million in May, and are 0.2 percent higher than the 4.31 million-unit pace a year ago. The median existing single-family home price was $181,600 in June, which is 15.0 percent below June 2008.

Existing condominium and co-op sales jumped 14.0 percent to a seasonally adjusted annual rate of 570,000 units in June from 500,000 in May, but are 3.1 percent below the 588,000-unit level in June 2008. The median existing condo price was $183,300 in June, down 18.9 percent from a year ago.

Regionally, existing-home sales in the Northeast rose 2.5 percent, 0.9 percent in the Midwest, 4 percent in the South, and 6.4 percent in the West.

Harlan Green © 2009

POPULAR ECONOMICS WEEKLY

Fed Chair Ben Bernanke said in his latest congressional testimony that we could expect a moderate recovery this year and next. What kind of a recovery will it be?

Firstly, we have to recognize how close we came to another Great Depression. In fact, this downturn is being called the Great Recession. He said in his testimony that “Aggressive policy actions taken around the world last fall may well have averted the collapse of the global financial system, an event that would have had extremely adverse and protracted consequences for the world economy. Even so, the financial shocks that hit the global economy in September and October were the worst since the 1930s, and they helped push the global economy into the deepest recession since World War II.”

So given the severity of this recession, we cannot expect that a strong rebound will occur this year, as we said last week. Why? Because this is a structural recession—the worst kind of recession—where the job losses in many sectors are permanent so that new jobs in new industries must be created to replace them.

That is why Bernanke said, “The recovery is expected to be gradual in 2010, with some acceleration in activity in 2011. Although the unemployment rate is projected to peak at the end of this year, the projected declines in 2010 and 2011 would still leave unemployment well above FOMC participants’ views of the longer-run sustainable rate.”

What are the improvements? The Index of Leading Economic Indicators rose for the third consecutive month and is up 4 percent over the past six months, with 10 of its 12 indicators turning positive.

The housing indicators also continue to improve with new-home sales rising and the NAHB builders’ sentiment survey up another 2 points. Housing will continue to improve as long as the Fed keeps down interest rates. It intends to “for an extended period”, according to Bernanke. Conforming and high balance conforming fixed rates are still below 5 percent, while super jumbo ARM rates are between 5.0-5.50 percent.

One reason that consumer spending has been stable is that consumer confidence has been rising in the face of the mounting job losses. Confidence is hard to pin down, but it looks like the stock market rally is one reason with all the stimulus money injected into the markets.

The key to any recovery will still be how consumers behave. They are still paying down record debt levels, to the lowest level since 1991. Once household debt gets back to historical levels, they will begin to spend again.

“The U.S. economy contracted sharply in the fourth quarter of last year and the first quarter of this year”, said Bernanke. “More recently, the pace of decline appears to have slowed significantly, and final demand and production have shown tentative signs of stabilization.”

That is, auto, retail and new-home sales, as well as nondefense capital orders have stabilized (i.e., orders by corporations investing again in plants and equipment). Obama’s stimulus spending is having an effect, in other words.

Harlan Green © 2009

POPULAR ECONOMICS WEEKLY

The expectations we hold illustrate how important confidence is to an economic recovery. And because the latest unemployment report wasn’t what the pundits expected, stock prices tanked, causing interest rates to decline back to historic lows. (It helps that the Fed is also buying Treasury Bonds, driving down rates further, of course.)

It’s hard to say what is driving the disappointment in expectations. It has in part to be the Obama Administration’s overoptimistic growth projections. But there also has to be alarm over the growing deflationary wage spiral that affects so many consumers. Yet after 30 years of supply-side economic policies—that depressed wage and salary growth that make up 80 percent of personal incomes—it will take more than a few years for consumers to spend again.

In fact, one reason that consumers are now saving more than they are spending (savings rate is up 5.7 percent vs. just a 2 percent annual spending increase) is their expectation that incomes will not improve very soon.

And expectations affect the general level of consumer confidence which in turn helps to determine when general economic conditions will improve. The optimists hope the recession will end this year, including President Obama’s Council of Economic Advisors, while many reputable economists say we will have to wait at least another year.

Yet expectations are notoriously hard to measure, since they are based on feelings more than facts. And feelings cannot really be measured, yet we have no other way to assess our futures. That is why economist Robert Shilling has focused so much research on the importance of the components that instill—or deflate–confidence, including trust in our financial institutions that was broken with the subprime debacle.

We know a consumer expectations survey by the Conference Board has risen more than 16 points since November 2008. But it cannot rise much more without an improvement in wages and salaries. Such wage deflation last happened during the Great Depression, as a result of very similar policies that saw a massive redistribution of wealth in the 1920s. President Roosevelt’s Federal Reserve Chairman Martin Eccles said at the time:

“… a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”

That is why so much of the Obama stimulus plan is devoted to creating jobs over the next 2.5 years. But it will be a slow process, since it has to reverse 30 years’ of policies that choked off wage growth.

What happens if the Federal Reserve worries so much about inflation that it begins to soak up all the excess liquidity before sufficient economic growth returns? A historical look at the 1937 recession (the Great Depression was actually 2 depressions, from 1929-33 and 1937-38) illustrates what happens when government tries prematurely to balance its budget.

The civilian unemployment rate had dropped from 25 percent to 10 percent by 1937, but quickly shot back up to 20 percent by 1938, prolonging the depression until the start of World War II.

The Obama Administration must therefore create more realistic expectations of future growth, a hard thing to do. One can only look at the various indicators that do the best job of measuring business sectors—whether in the service or industrial areas. Both have been improving of late. June business activity in the service industries shot up 7 points, for instance, and is on the verge of expanding after 2 years of contraction. Consumers (and so real estate) will be sure to follow.

Harlan Green © 2009

Why is confidence, or a lack of confidence, so important when it comes to the economy? Just like some diseases spread through being contagious, so does confidence. You’re at a party and overhear someone, or hear of someone, who says, “You know, things are getting better…” And so you start to look for signs to verify that. When people are confident they will go out and buy, invest, and lend.

Math-a-letes, far smarter than me, have developed correlation models between how confident the public is, shown in various surveys, and the GDP of a country. And in fact if you look back at the depressions in the 1890’s, or 1930’s, what is obvious is a lack of confidence, and people are distrusting. (In the dictionary “confidence” means trust or belief, and in fact comes from the Latin “fido”, meaning “I trust”. “Credit” comes from credo in Latin, meaning “I believe”.

The Conference Board’s Consumer Confidence Index dropped to 49.3 in June from 54.8 in May. Based on that alone, you would believe that the economy is not out of the woods yet - which is probably true.

The S&P/Case-Shiller Home Price Index of 20 U.S. Cities decreased 18.1 percent in April from a year earlier following an 18.7 percent drop in March. But the measure was down 0.6 percent in April from the prior month, the best performance since June 2008, and eight of the 20 cities showed an increase in prices from March.

In the last 12 months the worst performers were Phoenix (-35 percent), Las Vegas (-32 percent) and San Francisco (-28 percent). In more news, the Purchasing Managers Manufacturing Activity index rose to 39.9 percent in June from 34.9% in May, although a reading below 50 indicates a continued contraction.

Pending Home Sales increased .1 percent in May and up 4.6 percent versus a year ago. Construction Spending dropped .9 percent in May to its lowest level in 5 years, worse than expected, but the Institute of Supply Management Manufacturing Index rose to 44.8 from 42.8. On top of all of that, Federal Reserve Bank of San Francisco President Janet Yellen said that overnight rates could remain at .25 percent or lower for a few years.

But employers cut 467,000 non-farm payroll jobs in June, far more than expected, while the nonfarm unemployment rate rose to 9.5 percent - the highest since mid-1983. May’s numbers were revised down, but April’s were revised upward. We also had Jobless Claims, which dropped 16,000 - better than expected. But what will grab the headlines, and probably push the bond and stock markets, is the Non-farm Payroll number.

The Conference Board said, “After back-to-back months of strong gains, Consumer Confidence retreated in June. The decline in the Present Situation Index, caused by a less favorable assessment of business conditions and employment, continues to imply that economic conditions, while not as weak as earlier this year, are nonetheless weak.”

What is it that will return confidence to prior levels? Certainly interest rates are still at record levels, and fewer jobs have been lost in June. Any improvement in the unemployment rate will certainly boost consumers’ confidence. But since that won’t probably happen until next year, we can hope that the stock market rally and boosts from the stimulus spending will provide some feeling of increased wealth for consumers.

Harlan Green © 2009